FUTUBULL Help Center-How corporate actions are handled in a backtest
English
Back

How corporate actions are handled in a backtest

1. What is stock price adjustment?

Listed companies may choose to issue dividends or additional shares. These corporate actions can impact stock prices and create gaps in the price chart. Therefore, it's necessary to use stock price adjustment to reconcile corporate actions that result in stock price changes.

Stock price adjustment involves adjusting historical stock prices and trading volume based on the latest dividend or stock split data. The purpose is to ensure continuity between historical and recent prices, avoiding gaps caused by corporate actions.

 

2. Stock price adjustment in a backtest

There are two types of stock price adjustments: forward adjustment and backward adjustment.

Pre-event prices can be adjusted based on the price on the first day following the event, or post-event prices can be adjusted using the price from the last day before the event. Algo's backtesting will adjust the pre-event prices. Here is how stock price adjustment is used in the app.

2.1 Backward price adjustment

After a stock goes ex-dividend, historical stock prices need to be proportionally reduced to maintain continuity. During the backtesting period, Futubull will automatically adjust pre-ex dividend prices backward and handle cash and holdings in the account whenever a corporate action occurs. Taking a stock split as an example, the figures below show the price change without adjustment, as well as the backward adjusted price.

 

3. Summary

Stock price adjustment can help investors better understand the stock price trend. Algo's backtesting has a price adjustment function, which can help users simulate actual investment performance. For more information, please refer to the following examples below.

Corporate Action

Stock Price Change

Holdings Change

Example Before Corporate Action

Example After Corporate Action

 

Cash Dividend

 

  • Latest price falls
  • Past prices fall
  • Holdings remain unchanged
  • Holdings market value decreases
  • Account cash increases

 

  • Stock price: $20/share
  • Shares held: 100 shares

Cash dividend: $1 paid for every 10 shares held

New stock price: $19.9/share

Adjusted historical prices: All past prices decrease by $0.1

Total shares held: 100

Total market value of holdings: $1,990

Account cash increase: $10

Stock Split

 

  • Latest price falls
  • Past prices fall
  • Holdings increase
  • Holdings market value remains unchanged
  • Stock price: $20/share
  • Shares held: 100 shares

Stock split: 1 share split into 2 shares

New stock price: $10/share

Adjusted historical prices: All past prices divided by 2

Total shares held: 200 shares

Total market value of holdings: $2,000

Reverse Stock Split

  • Latest price rises
  • Past prices rise
  • Holdings decrease
  • Holdings market value remains unchanged
  • Stock price: $20/share
  • Shares held: 100 shares

Reverse stock split: Every 2 shares are merged into 1 share

New stock price: $40/share

Adjusted historical prices: All past prices doubled

Total shares held: 50 shares

Total market value of holdings: $2,000

Capitalisation Issue

  • Latest price falls
  • Past prices fall
  • Holdings increase
  • Holdings market value remains unchanged
  • Stock price: $20/share
  • Shares held: 100 shares

Capitalisation issue: For every 10 shares held, an additional 10 shares are given

New stock price: $10/share

Adjusted historical prices: All past prices halved

Total shares held: 200 shares

Total market value of holdings: $2,000

Bonus Issue

  • Latest price falls
  • Past prices fall
  • Holdings increases
  • Holdings market value remains unchanged
  • Stock price: $20/share
  • Shares held: 100 shares

Bonus issue: 10 new shares given for every 10 shares held

New stock price: $10 per share

Adjusted historical prices: All past prices are halved

Total shares held: 200 shares

Total market value of holdings: $2,000

Rights Issue

  • Latest price falls
  • Past prices fall

 

  • Holdings remain unchanged
  • Holdings market value decreases
  • Account cash increases
  • Stock price: $20/share
  • Shares held: 100 shares

Rights issue: 1 additional share at $15 for every 4 shares held

New stock price: (1 share at $15 + 4 shares at $20) / 5 shares = $19 per share

Adjusted historical prices: Original price × 0.8 + $3

Total shares held: 100 shares

Total market value of holdings: $19 * 100 shares = $1,900

Account cash increases by $100

Additional Shares

  • Latest price falls
  • Past prices fall
  • Holdings remain unchanged
  • Holdings market value decreases
  • Account cash increases
  • Stock price: $20/share
  • Shares held: 100 shares

 

Additional shares: For every 4 shares held, 1 additional share could be purchased at $15/share

New stock price: (1 share at $15 + 4 shares at $20) / 5 shares = $19 per share

Adjusted historical price = Original Price × 0.8 + $3

Total shares held: 100 shares

Total market value of holdings: $19 * 100 shares = $1,900

Account cash increases by $100

Separation

  • Latest price falls
  • Past prices fall

 

  • Holdings remain unchanged
  • Holdings market value decreases
  • Account cash increases (the other company's stocks obtained through separation are converted into cash)
  • Stock price: $20/share
  • Shares held: 100 shares

Separation: 1 share of another company is given for every 10 shares held

New shares are worth $5 each

Total shares held: 100 shares

Total market value of holdings: $1,950

Account cash increases by $50

This presentation is for informational and educational use only and is not a recommendation or endorsement of any particular investment or investment strategy. Investment information provided in this content is general in nature, strictly for illustrative purposes, and may not be appropriate for all investors. It is provided without respect to individual investors’ financial sophistication, financial situation, investment objectives, investing time horizon, or risk tolerance. You should consider the appropriateness of this information having regard to your relevant personal circumstances before making any investment decisions. Past investment performance does not indicate or guarantee future success. Returns will vary, and all investments carry risks, including loss of principal. Our platform makes no representation or warranty as to its adequacy, completeness, accuracy or timeliness for any particular purpose of the above content.